A crisis in the securities or financial markets often goads governments into action. India has been no different than the US and the UK where major securities laws were changed after financial meltdowns. It took the securities scam of 1991-92 for the government in which Manmohan Singh was the finance minister to issue an ordinance and then secure the approval of parliament to provide statutory backing for the Securities and Exchange Board of India (Sebi) although by that time the regulator had been in existence for close to four years.

Years later, another stock market scam in 2001 forced the government to arm the regulator with more powers. UK Sinha, the current chairman of Sebi, is no stranger to this. A decade ago, as joint secretary in charge of the capital markets division of the finance ministry, Sinha did several rounds of the law ministry to help push through changes in the securities laws based on the recommendations of the Joint Parliamentary Committee (JPC) formed after the 2001 securities scam.

At a time when obtaining approvals for fresh legislation from the country's lawmakers is a major challenge, the government has sought to empower Sebi by issuing an ordinance aimed primarily to crack down on promoters of Ponzi schemes. The trigger: the collective investment schemes led by Saradha in West Bengal and perhaps based on the regulator's experience of dealing with the Sahara group.

The Securities Laws Ordinance, 2013 vests India's securities market regulator with sweeping powers — which are sure to be the envy of many agencies — both at home and abroad. No longer does Sebi have to approach a magistrate for approval for search and seizure operations. The Sebi chairman can approve it; the law allows for entering and searching with assistance a building, vessel, vehicle or aircraft where the regulator suspects documents or information are kept. Similarly, Sebi will now be well equipped to recover penalties imposed by it, which either companies or individuals have refused to pay, or on disgorgement orders. The new law empowers Sebi to attach immoveable properties and bank accounts of those violating the rules of the securities market, a provision which Sinha says is one of the most important powers it has been given and one which he reckons will boost the regulator's effectiveness. Adding more strength is the proposal under the new law to form special courts to try cases related to the capital market and access to call records; the market watchdog has struggled for a long time with the latter, dating back to the time when P Chidambaram was finance minister during the United Progressive Alliance's first term in office.

CAUTION, THE BYWORD

Over the years, lawmakers and professionals in the financial sector had backed the case for empowering Sebi especially in a regulatory landscape where turf issues undermined efforts to curb violation of rules. "Yes, it is good that Sebi has been given more powers as it is necessary for the regulator to be more effective but it is important that such powers are used with restraint," says MS Sahoo, a former member of Sebi and now secretary of the Institute of Company Secretaries of India.

There are good reasons for even those who are well meaning towards the regulator to sound cautious. As early as 2002, the law empowered Sebi to engage in search and seizure of books of accounts after approval from a magistrate. Yet, those powers were used just once in a little over a decade with one apparently botched attempt leading to questions being raised in Parliament.

Sebi's powers now to swoop down on those violating its rules are perhaps as good as or better than those of the Income Tax Department which, over the years, has had to temper its enthusiasm after being rapped by the courts for over-reach when it came to search and seizure besides attachment of assets. Having sought and now obtained greater powers, it will be a challenge for the market regulator to ensure that it has adequate supporting evidence on suspected breach of rules before setting out to search, seize and attach.

Ajay Shah, professor at the National Institute of Public Finance and Policy, worries about potential misuse of these powers. According to him, in the deeper financial markets such as the US, the UK, Australia and Canada, there is a due process to be followed when such powers are exercised with a clearly laid out accountability mechanism. Based on the experience of those jurisdictions, a government-appointed committee has drafted a report aimed at an Indian financial code which will replace all the laws in the financial sector and force regulators to be more answerable to lawmakers and in turn to other stakeholders. There are many others who say that Sebi will have to build adequate internal checks and balances to ensure that officers are not trigger-happy and stay within the confines of law, to avoid charges of harassment. The US Securities and Exchange Commission may also be found wanting sometimes but is perceived to be professional given the way it exercises its powers.

NEW CHALLENGE

The relative success of some of the overseas regulators also has to do with a clear separation of the two functions of investigation and enforcement. The Income Tax Department too follows this approach. And these are the divisions which are supposed to be staffed by the best in the organisation — in terms of skill, ability, track-record and integrity. Sebi is a relatively young oversight agency compared to the Reserve Bank of India, and it will have to ensure a quality of personnel who can exercise the newly granted powers professionally and with a sense of maturity. The onus of approving each case of search and seizure is on the chairman — which makes it imperative that the chain of command does not falter. In other words, it will have to up its game when it comes to enforcement. Without taking anything away from the government and the regulator's efforts at greater empowerment, it is a sobering thought that with hardly any of these powers, stockbrokers in Mumbai were forced to dash to New Delhi in the early 1990s to petition the government to restrain Sebi and its chairman, GV Ramakrishna. Two decades later, the market watchdog now has the necessary legislative backing to police the markets effectively; its challenge will be to demonstrate that it has earned these new powers rightfully, and that arming it powerfully has been well worth the effort.